Quote from brettman9:
Thoughts on the dollar in all of this mess:
This is another interesting situation to me, and some have brought it up implicitly or explicitly in this thread.
I have to say, sure I am a bit worried about inflation. But only because I'm worried that people are worried about inflation. The same two sentences could be said about the dollar.
But the comparison with the 1970's inflation doesn't work at all. In other words, it is not the case that the 1970s were a potential deflationary bust that policymakers turned into an inflationary one with excessive monetary support. The roots of a deflationary bust lie in the expansion of a credit bubble and its subsequent collapse. The roots of an inflationary bust lie in the gradual entrenchment across the economy of expectations of an undesirable pace of inflation, and the supplying of enough money to make those expectations actionable.
Hence, the current situation is unique among the three 'supercycle' corrections shown in the original chart in that it aligns, in principle, as a deflationary bust, but unprecedented monetary and fiscal measures have stoked fears of an inflationary outcome.
This has opened the door for reasonable fear about the future of the dollar (and a market for the views of those like Peter Schiff and his ilk).
But the 1970's were an inflationary bust all the way. The problems were, first, government financing of the Viet Nam war, then the untethering of the currency system from the Bretton-Woods limitations, and then the existence of very very stupid mechanisms that promoted positive feedback loops. For example, labor union strength at the time created contractual obligations in a number of industries to tie wage growth to inflation. This, of course, simply meant that, if inflation increased, then companies would have to raise prices to afford their payrolls, which just gave the wage-earners more money to afford the inflated prices.
We know how stupid that was now.
There is no doubt in my mind that there will be unintended consequences for the unprecedented policy effort now in effect. But I'm not sold on it being the death of the dollar.
In fact, I'm inclined to suggest a long dollar strategy. The dollar has been in a bear market for about a decade. Bear markets of that duration, in any asset, conclude only when everyone is convinced that the end-of-the-world scenario is totally believable for that asset. At this point, we are above the summer 08 lows and sentiment is far worse for the currency, which is a potentially important divergence scenario.
In my view, everyone is positioned for the dollar to get decimated and the dollar carry-trade has grown massively in the past 2-5 months, which means a one-sided position of enormous proportion is sitting there just asking for a catalyst to come along and force its unwinding.
And there is one rule I have learned well over the years: that major bottoms are made if and only if the market in question is overwhelmingly positioned for continuation lower. Hence, if you believe central banks are not going to waver in their use of the dollar as reserve currency, then we have reached that point for the dollar.
Note, I understand that the situation is ripe for some sort of reorganization of the reserve currency mechanics. But the idea that China and Japan are going to "pull the plug" on the US is absurd - it would decrease the value or our debts and their assets...you do the math. They're far more likely to intervene than abandon. The same could be said of the ECB. We're more likely in an age of competitive devaluation than anything else.
But the fact that drives my perception most of all is as follows: When you start seeing a clear consensus in public sentiment as expressed by NY Times best-sellers and you-tube popularity that we're heading for a continuation move in a market that has been in a large degree trend for a decade...Watch out!
